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Sat, Jul 17, 2004 - Page 12 News List

Nokia slashes Q3 earnings forecast and phone prices

OUTLOOK The mobile phone giant reported a second-quarter drop in sales but analysts said its price-cutting strategy could could force rivals to drop out of the business

NY TIMES NEWS SERVICE , LONDON

Nokia, the world's largest mobile phone maker, reported a second-quarter drop in sales on Thursday and slashed its earnings forecast for the current quarter, as it continues to cut prices to try to win back customers.

The company's price-cutting strategy, analysts said, could force other mobile phone makers to merge or drop out of the business.

Nokia's chairman and chief executive, Jorma Ollila, said on Thursday that Nokia had seen positive developments in emerging markets, but that Europe and the US remained challenging.

Total sales for the second quarter fell 5 percent from a year ago, to 6.64 billion euros (US$8.19 billion), while operating profit from mobile phones fell 39 percent, to 797 million euros. Net income was 712 million euros, up 14 percent from last year, when the company took charges for job cuts.

Nokia, based in Espoo, Finland, also presented a grim third-quarter outlook that took markets by surprise. The company said its earnings in the third quarter would be 0.08 euro to 0.10 euro a share, sharply lower than analysts' consensus of 0.14 euro a share. It was the third earnings warning in three months for Nokia.

The company's stock plummeted on the news, and closed down US$1.79 to end at US$12.45 on the New York Stock Exchange.

"We expect our profitability to continue to come under pressure during the second half of the year," Ollila said, as the company cut prices again in order to claw back market share.

The impact of the price cuts, he said, will more than offset any gains from new products.

Analysts say that Nokia's price-cutting strategy could have a serious impact on the industry.

"Vendors who are already strug-gling to break even will probably go back into losses" after they cut prices to compete, said James Crawshaw, an analyst with Commerzbank in London.

"In order to cope with this pricing environment, the industry is going to have to see some consolidation," he said.

Nokia's second-quarter results were in strong contrast to its much smaller rival, Sony Ericsson, which reported a 34 percent increase in second-quarter sales on Thursday, to 1.5 billion euros. Units shipped in the quarter increased 55 percent, to 10.4 million, and net income was 89 million euros, up from a loss of 88 million euros a year ago.

"Twelve months ago, some brave decisions were taken, and now they're paying off signifi-cantly," said Sony Ericsson's new president, Miles Flint, in an interview in London.

Sony Ericsson shut research centers and discontinued some products in the US last year to cut costs and analysts said it has distinguished itself by developing innovative products.

After dominating the mobile phone market for years, Nokia lost ground last year to competitors. It started cutting the price of its mobile phones last quarter, in an attempt to increase market share, and has said it hopes to reach a 40 percent share.

Ollila said on Thursday that the company estimated it had supplied 31 percent of the world's mobile phones in the second quarter, com-pared with 32 percent in the first quarter. Nokia said its market share In the second quarter last year was 39 percent.

"Our pricing moves were successful in stabilizing our market share," Ollila said.

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